Stock Ideas 
Stock Ideas Investors Daily Edge Markets to the Fed: DROP DEAD!
Stock Ideas Investors Daily Edge Markets to the Fed: DROP DEAD! 
Market Watch
|
iShares MSCI South Africa ETF (EZA) Power outages and inflation are literally crippling South Africa. Experts are saying the power problems are going to be around for the next decade. Ten years of rationing power to big businesses like Gold Fields, Ltd. (GFI:NYSE) and Anglo American (AAUK:NASDAQ). |
|
| More... |
Most Popular
Login Form
| Markets to the Fed: DROP DEAD! |
| Saturday, 11 October 2008 | ||||||||
|
It didn't really matter that the Fed dropped interest rates by over two percent in the past 12 months… or that they bumped up lending to $900 Billion… or that they decided to buy up commercial paper from corporations… or even that they worked with the Treasury to bail banks out to the tune of $700 Billion. The market tanked. It basically told the Fed to drop dead. This chart should say it all…  That's a horrid performance. And practically everyone has felt the pain this drop has caused. But here's the kicker… During this entire drop, the government has intervened in the market an unprecedented number of times.
First, the emergency rate cut in August, followed by lending to investment brokerages (A first). Then we saw more rate cuts, Bear Stearns got sold to JP Morgan (thanks to the Fed), more rate cuts, the Fed saving Freddie, Fannie, and AIG. Then the SEC stepped in and issued short-selling bans on two separate occasions (and lightening the mark-to market rules banks must follow for pricing their assets). And of course, that doesn't count recent events, with the Fed buying commercial paper, paying interest on reserves (to the banks), increasing their lending facility to $900 billion, the infamous $700 billion bailout package, and the most recent was the coordinated interest rate cuts with central banks around the world. All of these things have increased the amount of credit banks can receive from the Fed. They've kept the market from imploding, but not much more. The credit markets are still frozen to corporations and consumers. Unemployment is ticking higher, banks are failing across the world, and California is on the brink of bankruptcy (as well as Iceland). I've discussed on numerous occasions how the markets work and why credit is so important to corporations. This freeze we're seeing should give everyone pause regarding the future of our economy. Morgan Stanley agrees. They've called for negative GDP growth for the next three quarters, and 150,000 job losses every month until the middle of next year… at least that's the hope. But perhaps the most amazing thing about this recent crisis is how little power the Fed has over not only interest rates, but market psychology. It seems that every single day they come out with a new tool to help "unthaw" the credit markets. These are the same credit markets that have been nearly frozen since last August. They expect investors to regain confidence. But I have to wonder how the heck I can be confident about a government that is panicking itself. Not only that, but if everything they've done hasn't prevented what's happened, then how much power do they really have? Even though the Fed has dropped interest rates sharply, banks haven't followed. In fact, banks are charging each other record interest rates just to lend short-term. What we're seeing today is a crisis of confidence due to bad assets on the balance sheets of banks across the world. This crisis of confidence doesn't want to end anytime soon. As foreclosures, job losses, and corporate bankruptcies increase, the markets will get even uglier. The Fed can't do much about that unless they want to spend hundreds of billions more fixing mortgages individually. Until that day comes, it's imperative that you limit the stocks you have in the market. My bias is to stay short. You can position yourself during the mini-rallies we're bound to see. You can do that by using weekly oscillators (like RSI or Slow Stochastic) and shorting stocks when the market becomes overbought. Remember, earnings drive stock prices. And as Alcoa showed on Tuesday, earnings are collapsing. Stock prices should follow. Although I feel we might be in for a short-term rally, downside will still exist. We shouldn't be shocked to see the Dow around 8,000 over the next 12 months. And we probably won't see a bottom until late 2009 or early 2010. Stay Safe, Charles
This investment news is brought to you by Investor's Daily Edge. Investor's Daily Edge is a free daily investment newsletter that is delivered by email before the market opens. It's published by Fourth Avenue Financial, a subsidiary of Early To Rise (an affiliate company of Agora Publishing). In each weekday issue you'll receive practical strategies for protecting your portfolio and multiplying your money. You'll also learn about undiscovered opportunities in emerging sectors and markets, deeply discounted stocks, recommendations for bonds, cash, commodity and real estate investing, and top ETFs. To view archives or subscribe, visit Investor's Daily Edge .
|
||||||||
| < Prev | Next > |
|---|